Indian tax treaty benefits available without providing a tax residency certificate

The Income-tax Act, 1961 was amended in 2012 such that non-resident taxpayers are not entitled to claim relief under a tax treaty unless they obtain a tax residency certificate (TRC) from their country of residence. But a recent court ruling has changed the situation.

The Income-tax Act 1961 was amended in 2012 such that non-resident taxpayers are not entitled to claim relief under a tax treaty unless they obtain a tax residency certificate (TRC) from their country of residence.

The Income-tax Appellate Tribunal recently ruled that not providing a TRC cannot preclude a non-resident from availing treaty benefits, as long as the taxpayer is able to substantiate their residency through other evidence.

Indian law contains a broad treaty override provision which states that in respect of non-residents to whom a treaty applies, the provisions of domestic law apply only to the extent that they are more beneficial than the treaty. The tribunal held that the provision making it mandatory for a non-resident to obtain a TRC did not prevail over this general treaty override provision.

It also noted that this requirement of a TRC could not be construed as a limitation to the supremacy of a treaty over domestic law, and that it could be treated only as a beneficial provision (i.e. once a non-resident provided a TRC in the format required by law, the tax authorities could not requisition further details to support the non-resident's claim for treaty benefits).

Preparatory activities prior to entering into a contract are not to be considered when determining the duration for installation permanent establishment (PE)

Under the India-Cyprus treaty, a building site, construction, assembly or installation project, or related supervisory activities constitute a PE if the site, project, or activities remain operational for more than 12 months. The tribunal in the case of Bellsea Limited ruled that preparatory and auxiliary activities involving collecting data and information to make the bid could not be included when calculating the 12-month period.

The tribunal also noted that the taxpayer had not installed a project office or developed a site prior to entering into the contract. It held that preparatory activity purely for making a bid before entering into the contract, and without carrying out any activity of economic substance or active work, ought not to be regarded as activities for carrying out installation or construction in India. The tribunal also clarified that this principle would not extend to active preparatory or auxiliary work carried out after the contract was awarded.